Escrow in Real Estate will be a Boon for Homebuyers

By : 360 Realtors

19 June, 2020

The imposition of escrow by RERA comes as a major advantage for the homebuyers. Aimed at improving trust, transparency and stability in the real estate sector, this would help prevent project delays to some extent. The RERA has mandated that developers must transfer 70% of the money received from a buyer into an escrow account which would stay under the purview of a commercial bank or a recognised lender. The developer would be allowed to withdraw this money only for the project to which the escrow account belongs. This would prevent the misuse of money for one project on a different one. This in turn would reduce project delays which often take place due to lack of funds when the developer diverts the funds of one project into another.

Currently, at least 220 housing projects are running late across 7 major cities in the country. These 220 projects account for about 1.74 homes. As per another report, the number of delayed residential units across India is about 4.45 lakhs. The real estate sector in India still lacks transparency in many cases. The introduction of escrow would help build trust among the buyers towards the developers and create a positive ecosystem in the real estate sector.

Apart from the primary market, the implementation of escrow in the secondary market, that is the resale of properties, would also be a major progress. Without a proper regulatory body, this market of the realty sector is still less transparent. Sellers often force the buyers to pay unreasonably high amounts of money. Right now, especially intensified by the COVID-19 crisis, transaction activities are low and most property buyers are going for ready-to-move-in homes. Thus, the secondary market is growing, with resale activities increasing. The implementation of escrow in the secondary market by the government is going to be a crucial requirement. This would also help to improve the credibility of real estate players reselling properties.

Escrow could also be utilised in the rental sector of real estate to benefit both the landlords and the tenants. The market of rental properties is highly unregulated. However, an escrow account would ensure that the landlord maintains a healthy and safe environment, complying with the legal requirements. The escrow account would also become handy when repayments are required. A number of foreign countries have already integrated a model of escrow into the rental real estate sector. Indian realty can also replicate it to improve transparency and fairness.

RERA has also made a number of mandates to prevent developers from cheating the system. For example, an architect, an engineer or a chartered accountant must certify the withdrawal of funds. This would ensure the validity of the developers’ claims. Moreover, it is compulsory for the developers to get their escrow account audited by a certified chartered accountant. This must be carried out within six months of the end of each fiscal year and the statements of the accounts must be signed by the same chartered accountant to be considered valid.

It can be concluded that RERA is constantly carrying out the purpose it was established for, i.e., improvement of transparency in the realty sector.